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Tick tick tick.  The time is running down and Congress continues to fight over the payroll tax cut that benefits millions of workers in the United States.  Including rich and poor alike.  For 2011, Congress allowed Americans a 2% decrease in the payroll tax that funds Social Security (FICA).  The FICA withholding has been 6.2% for many years on an ever increasing portion of your paycheck (up to $106,800 of wages where it caps for now—going to $110,000 of wages in 2012).  So, if you earn $75,000, your FICA withholding is normally $4,650 ($75,000 x .062).  And your employer contributes a matching  $4,650. During 2011, with the 2% reduction, it was $3,150 – a tax savings of $1,500—money in your pocket—up to $2,136 ($106,800 x .02).  Your employer did not get any savings and still funded your SS account with your wages times .062.

[Incidentally, Social Security and Medicare are “flat” taxes – everyone pays the same percentage, up to the limits.  If you earn $25,000 a year, in most recent years you will have had $1,550 subtracted from your paycheck to fund Social Security ($25,000 x .062) and $363 subtracted to fund Medicare ($25,000 x.0145).  A person earning $106,800 (the Social Security cap) contributed $6,622 to his/her Social Security account and $1,549 to his/her Medicare account.  A person earning $1 million in wages paid $6,622 (106,800 x .062)(ie the same as the person earning $106,800) to the Social Security account and $14,500 to Medicare—because there is no cap on Medicare.  Your employer matched your contribution to Social Security and to Medicare dollar for dollar, thus doubling it.] 

The House passed a bill days ago allowing a continuation of the 2% tax break for 2012 on nearly party lines, pro Republican.  But before you leap for joy, please note that the Republicans did not send a “clean bill” to the Senate.  Oh, no.  They had to tack on a forced commencement of the construction of the 1700 mile Keystone XL oil pipeline that stretches from the tar oil sands of Canada to the oil refineries in Texas.  The Republicans knew that the Democrats  oppose the pipeline for a variety of reasons including cost and environmental impact.  The Republicans believe that 20,000 jobs will be created.   The Democrats counter that only about 3,500 jobs will come to fruition.   Bottom line – the Republicans were pretty sure that the bill would not make it through the Senate. They were right.   Playing politics with the middle class once again, each side eager to make the other side look really bad.

For a much longer read on this topic:

So – what will happen?  Who knows.  I don’t agree with much of what Michelle Bachmann says, but I was startled to hear her say on the debate this week that the 2% reduction is bad public policy.  I agree!!  I hate paying higher taxes.  I hate having my clients pay higher taxes.  But the reality is that Social Security is in trouble and a lot of seniors depend on it.  We are the wealthiest nation on earth – in the history of modern civilization.  It would be a travesty to allow poor American seniors to live on the street without the safety net of Social Security.  My own grandfather reportedly starved to death during the Depression after an injury forced him from his day labor job.   No one wants that to happen again.    Can we really afford to reduce our contributions to such a fragile institution and put elderly poor people at risk?  We have all been humbly reminded during these tough economic times that “there, but for the grace of God, go I.”

That said – my question last year was WHY are we giving this tax break to the worker (even though I admit that I enjoyed having a tad more money every month)?  If we gave it to the employer, wouldn’t it encourage employers to hire more workers?  If we are going to have public policy that weakens Social Security by a decrease in contributions, why not do it in a way that negates the decrease by putting people back to work—thus shoring up the system with additional payroll taxes paid by additional employees?  Or even better – how about lowering the overall rate for Social Security contributions permanently to 4.2% (or lower!) for employee and employer alike and simply remove the cap, like we have done for Medicare.   Perhaps naïve – certainly not popular with Congress people seeking reelection.  What do you think?

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